March 20 (Bloomberg) -- After Valeant Pharmaceuticals
International Inc. bought Bausch & Lomb Inc. for $8.7 billion
last year, Chief Executive Officer Mike Pearson discovered the
budget for the eyecare company’s communications team was 13
times the size of his own.

Pearson set about cutting the budget and dismantled Bausch
& Lomb’s structure of regional offices, costs he said are
emblematic of how inefficient drug companies remain. Corporate
excess is catnip to Pearson as he searches for acquisitions to
meet his goal of making Valeant one of the world’s top five
drugmakers by the end of 2016.

“There’s a very bloated cost structure in the pharma
industry because of how much money they make,” Pearson said,
listing personal secretaries and investment bankers as
unnecessary expenses, in an interview at Bloomberg’s Toronto
office yesterday. “We tend to look for companies with problems
that we can fix. We like companies that are fat, lots of costs
that we can take out.”

Pearson, 54, who took the helm of Laval, Quebec-based
Valeant in 2008, has spent at least $19 billion buying more than
35 companies in his drive to leap into the drug big leagues.
Rather than spend what he says can be billions of dollars
developing drugs from scratch, he buys companies with existing
products like Bausch & Lomb, his biggest acquisition to date.

Pearson reiterated yesterday he’s aiming to do a similar-sized deal this year, declining to name any companies. Teva
Pharmaceutical Industries Ltd., the Israeli maker of generic
drugs, has been mentioned as a possible target by analysts
including Raghuram Selvaraju of Aegis Capital in New York.

Dentist Office

He said he’s looking at segments such as opthalmology,
dermatology and dentistry, areas in which the company already
has a presence. Valeant bought dental care company OraPharma
Inc. for $312 million in 2012, acquiring the product Arestin
used to treat gum disease.

“In the United States, $20 billion of products run through
dental offices each year,” the CEO said. “It’s entirely
underserved. It’s a great market.”

The company favors products where consumers pay, rather
than governments, and regions where drug use is growing fast,
including the U.S., Southeast Asia, Poland and Russia.

In Russia, Valeant sells $400 million to $500 million worth
of over-the-counter medicines like AntiGrippin for treating
colds. Sales growth in the country was as high as 20 percent and
has slowed since the onset of the Russia-Ukraine dispute to low
double digits, he said.

McKinsey Man

Pearson said he doesn’t view India as a favorable market
because “prices are terrible and they have no respect for
intellectual property.”

Pearson grew up the son of a Bell Canada phone company
employee in southern Ontario and says he learned the importance
of value early.

“I grew up in a middle-class family and every dollar
mattered -- a lot.”

He and his family saved up so he could go to Duke
University in Durham, North Carolina, to study engineering. He
graduated summa cum laude and then stayed in the U.S. to study
for an MBA at the University of Virginia. From there he went to
work for consulting firm McKinsey & Co., where he stayed for 23
years and advised mining companies, a hotel chain and a chicken
producer.

“What it afforded me is a perspective to how other
companies are run and what the differences are,” said Pearson,
who now takes about 300 flights a year instead of the 400 he
took at McKinsey. “You don’t have to gold-plate everything.
Spend money where it adds value and be thoughtful.”

Joining Valeant

He gravitated toward the drug industry and Valeant became a
client in 2007. Impressed by the advice he gave the company,
Valeant’s board asked him to become CEO and he did so in
February 2008.

Valeant merged with Canada’s Biovail Corp. in 2010. The
company has a sizable presence in Bridgewater, New Jersey, but
is headquartered in Canada in part because of lower corporate
tax rates, Pearson said. Canada’s corporate tax rate is 26.1
percent compared with 39.1 percent in the U.S., according to the
Organization for Economic Cooperation and Development.

Since then, Valeant’s shares have jumped almost 10-fold to
more than $140 as investors have warmed to his acquisition-fueled pledge. That has lifted the market value of the company,
which trades in Toronto and New York, to about $47 billion,
making it the fifth-largest company in Canada.

Acquisition Risk

It has also made Pearson a lot of money. He owns 3.39
million shares, which as of yesterday’s close are worth about
$478 million.

Valeant rose less than 1 percent to $141.50 at 10:17 a.m.
in New York.

“He’s done a very good job with the acquisitions so far
and executing them,” Ted Whitehead, who helps manage C$1.2
billion ($1.07 billion) at Manulife Asset Management Ltd. in
Toronto including Valeant, said by phone yesterday.

Whitehead said he has been taking profit this year and the
acquisition strategy holds risk.

“The bigger you get, it becomes more difficult,” the
investor said. “The execution risk continues to go up. And when
you’re integrating two big companies, there could be culture
issues. It’s more than just the numbers that show up on the
paper.”

Expansion Goals

Three Valeant executives have left in recent weeks. Dan
Wechsler, an executive vice president who joined Valeant after
Bausch & Lomb was acquired, was appointed CEO of dental services
provider Smile Brands Group Inc. on March 5. Vince Ippolito, a
senior vice president and former executive at Medicis
Pharmaceutical Corp. that Valeant bought in 2012, was named as
chief commercial officer at Anacor Pharmaceuticals Inc. on March
10.

Susan Hall was named global head of research and
development at Dublin-based drugmaker Endo International Plc on
March 7. She had previously held the same title at Valeant.

Though Valeant remains much smaller than the companies
Pearson seeks to replicate -- Sanofi, the fifth-largest
drugmaker in the world has a market value of about $134 billion
-- he’s not daunted by reaching his three-year goal. The May
2013 acquisition of closely held Bausch & Lomb helped vault
Valeant from a market value of about $27 billion, he said.

“It’s not based on the size, it’s what you can do with
that asset,” Pearson said.

Sales Team

Bausch & Lomb gave Valeant contact lens brands Optima and
Boston to add to its roster that includes the Fraxel laser
treatment for skin care and Zovirax for cold sores. This week,
its new treatment for eye bags, Neotensil, is due to go on sale.

What Pearson doesn’t spend on research and development, he
plows into his sales force. Valeant has 7,000 to 8,000 sales
representatives of a total workforce of 20,000 -- a proportion
that is probably double other drug makers, Pearson said.

“Sales reps make the difference, they are the ones with
the relationships with the doctors,” he said.

Valeant has $17.3 billion in debt, data compiled by
Bloomberg shows. That puts Valeant’s ratio of debt to earnings
before interest, depreciation and amortization, a measure of how
leveraged a company is, above 4.5, according to a November
report from Moody’s. Pearson has pledged to get that below 4 by
the end of this year.

While Pearson calls on bankers to help with bond or equity
issues, he says he avoids using them to advise on its deals.
Valeant does that internally, tapping McKinsey alumni who work
at the company like executive vice president Ari Kellen. It also
helps that Valeant’s chief financial officer is Howard Schiller,
who was chief operating officer of Goldman Sachs Group Inc.’s
investment-banking unit from 2009 to 2011.

“Never use bankers,” Pearson said. “At McKinsey, we did
that for a living.”